Bear Stearns: A Lesson in Bear Market Bounces

The comments below are an edited and abridged synopsis of an article by Michael Leibowitz

The failure of Bear Stearns in 2008 was not a shock to most investors, and it is a valuable lesson today. In fact, many banks and a few notable hedge funds met a similar demise in the preceding two years. Further, house prices were falling, subprime loans were defaulting, CDOs were breaking, and a housing bubble of massive proportions was popping.

Bear Stearns: A Lesson in Bear Market Bounces - BullionBUzz - Nick's Top Six
A businessman and a businesswoman look up at a large bear as it casts its shadow across a stock market chart.

Low mortgage rates, relaxed borrowing standards, and poor banking regulation led to a housing bubble. Newly invented exotic financial derivatives tied to subprime mortgages multiplied the financial hardship for investors. Read or watch The Big Short by Michael Lewis for more information on the housing bubble.  

The pin was nearing the bubble when Bear Stearns failed. Despite the proximity to a system-wide failure, investors ignored the writing on the wall. After a brief respite and a double-digit rally, new financial leaks started springing.

By late summer 2008, it was apparent that Fannie Mae, Freddie Mac, AIG, and Countrywide were failing. Even the biggest banks and brokers like JPMorgan, Goldman Sachs, and Bank of America were in trouble.

The post-Bear Stearns rally was an opportunity to sell stocks and reduce risks. Many investors paid dearly for ignoring the fundamentals and hoping the worst was behind them.

Topics discussed: Bear Stearns; the current situation; don’t fight the Fed; is another Bear Stearns really happening; and summary.

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